Market Turmoil Live Blog

European markets were gripped by further turmoil Tuesday as the euro and European bank shares fell, sovereign and bank CDS spreads went out and base metals slumped – hitting all the major benchmark indexes. It came after euro-zone finance ministers delayed a decision on Greece’s next tranche of bailout loans and further fears were raised about troubled French-Belgian bank Dexia.

Prices of goods leaving factories across the 17 euro-zone countries fell in August as energy costs declined.

The European Union’s statistics agency Tuesday said prices charged by industrial companies fell 0.1% from July and were up 5.9% from a year ago.

The decline in producer prices is unlikely to ease concerns among the European Central Bank’s governing council, given that consumer-price inflation surged in September to 3% from 2.5%. The council meets Thursday, when it is expected to leave the key interest rate unchanged at 1.5%.

Spending on food, beverage and tobacco items was slashed by 12.3% in July, while money spent on furniture and electrical equipment also dropped 12.3%, the Hellenic Statistical Authority said in a statement.

On a revenue basis, retail sales fell 2.5% year-to-year in July after an 8.3% slide the previous month, the Hellenic Statistical Authority said.

PARIS–The chief economist of the International Energy Agency said Tuesday he is “very” concerned about the health of the global economy and that he is closely watching current consumption data in Europe, the U.S. and emerging countries like China and India.

“We are observing the developments day by day,” IEA chief economist Fatih Birol said after hosting a briefing on fossil fuel subsidies. “It is difficult to say” the current trends in key economic centers around the world are “optimistic.”

Mr. Birol said oil prices depend on the outlook for future economic growth. Right now, there are warning signs in Europe, the U.S. and throughout emerging nations like China that helped sustain the global economy in 2008, he said.

The Greek finance ministry has unveiled plans to put 30,000 public servants in a labor reserve by the end of 2011 as a means of reducing its wage bill.

The move is aimed at saving money, like so many other decisions recently, but this step has touched on a highly emotional chord among those on Athens streets. The public sector and its job for life status, backed by the country’s constitution, are at threat and shaking what Greeks have believed in for decades.

Despite the difficulties, cuts in the public sector is a one way road to recovery for the country.

The U.K. Debt Management Office received robust demand at a sale of 10-year gilts on Tuesday, with the auction underpinned by rising expectations of monetary easing by the Bank of England as well as renewed jitters in financial markets that sparked a bid for assets perceived to be safer.

Deutsche Bank has just provided an outlook on its third quarter results and profit target for 2011, and neither is offering cheer.

According to an announcement from the bank, CEO Josef Ackermann will tell an investor conference in London that the Group will make impairment charges on Greek sovereign debt of €250 million.

Meanwhile, third quarter results will “come in significantly lower than expected” for the Corporate Banking and Securities Corporate Division and, because of a “significant and unabated slowdown in client activity” in that divison, 500 jobs will go.

The Stoxx Europe 600 banks index took a battering Tuesday morning, down 3.6% at 125.33, amid mounting concern about a Greek default.

“Investors are facing the real possibility that bank exposures to sovereign debt and an increasing shut-down in interbank lending markets could trigger a new banking crisis,” says City Index.

“It is becoming more and more likely that banks may have to take a larger haircut to their Greek debt holdings, particularly with Greece unable to meet fiscal deficit reduction targets laid out by the Troika,” it adds.

French issues, which have a high exposure to Greek debt, are the worst hit, with Société Générale and BNP Paribas down 5.2%. Franco-Belgian Dexia is the biggest decliner, down 24% amid reports it may be broken up and sold.

The FTSE 100 dropped 2.3% to 4960.47 Tuesday morning, pushing further into the red with losses across the board as investors continued to fret about the possibility of Greek default.

As a result, banks suffered the brunt of the selling, with Barclays down 5.6%, RBS down 5.2% and Standard Chartered down 3.9%.

“After seven weeks of trying to move higher, the index is still just 1.5% above the 5007 level it dropped to on August 10 and one senses that if the lows were to give way the drop that followed would be substantial,” says Charles Stanley.

“In such a case the first port of call would almost certainly be the absolute low [year-to-date] that was hit on August 9, at 4791,” it adds.

Capital Economics said the deterioration in global manufacturing confirmed in the September purchasing managers’ index data mean that underlying demand for commodities is weakening.

Most worryingly, the world ‘new orders’ component, which is the most forward-looking snapshot, fell the furthest, arguing for an uncertain future.

There is a reasonably close relationship between the global manufacturing PMI and changes in the prices of industrial metals (which suggests perhaps that the risk trade has had only a short-term influence on prices here in any case), even if, as Capital said, it is far from certain which leads which.

The relationship between the PMI and changes in the oil price is less close, but, Capital said, “recent weakness in oil prices is also consistent with the deterioration in the global manufacturing data, which shows little sign of abating.”

The European Union is determined to ensure stability within the single currency bloc, European Council President Herman van Rompuy said Tuesday.

“The EU is determined to maintain stability of euro area,” he told reporters after a meeting with Brazilian President Dilma Rousseff. “We will continue to act in a forceful way to address the current tensions in sovereign debt market.”

Copper is trading below $7,000 a metric ton on the London Metal Exchange Tuesday as the base metals remained locked on events in the euro zone.

At 0941 GMT, flagship three-month copper was down 2.1% at $6,837/ton.

However, despite heavy losses in other markets, most base metals are showing some reliance, with aluminum edging up a little on the day and zinc, lead and tin down only a tad from the previous session’s close.

Copper is still well above Monday’s 14-month low at $6,635/ton and could make a break back above $7,000/ton later in session if lower price levels trigger bargain buying, say analysts at FastMarkets.com.

That said, any fresh bearish news out of Europe would likley tip base metals lower in negative territory, analysts say.

Spain’s Labor ministry said Tuesday jobless claims soared in September due to the end of the country’s labor-intensive holiday season, a sign that Spain’s overall unemployment, already the highest in the developed world, may still climb further later this year.

The EU and IMF want even more blood out of Greece, adding to their demands for cutbacks the provision that Greece must drop its blanket wage agreements for the private sector.

This has been added to the broad wage cuts and layoffs being imposed on public-sector workers–and could worsen delays that are driving European financial markets into despair and casting a darkening cloud over the euro itself.

The cost of insuring European sovereign debt against default is on the rise Tuesday, with Germany reaching a new record high, after news coming from a meeting of euro-zone finance ministers on the region’s debt crisis affected markets.

Tuesday, Germany’s five-year credit default swaps spread hit a record – 0.06 percentage points wider at 1.22%. This means it now costs an average of $122,000 a year to insure $10 million of debt issued by the country.

Pressure was felt on core countries CDS spreads, with Belgium hit by woes on Dexia, which is under pressure as it faces funding problems and is exposed to peripheral debt.

On Tuesday France’s CDS Spread was 0.08 percentage point wider at 1.98%, while Belgium was 0.14 percentage point wider at 2.86%.

The average selling price for a range of crude oil grades produced by the Organization of Petroleum Exporting Countries has dipped below $100 a barrel for the first time since February, according to data posted on the group’s website Tuesday.

The average price fell to $99.65 a barrel on October 3, $1.92 below the previous price posted on September 30, OPEC’s web site said. This is the lowest price since February 18, when political turmoil began to affect oil production in North Africa, the web site showed.

Euro Stoxx 50 was 2.4% lower at 2,087.70 Tuesday morning and the tone remained sullen. US stock futures also fell as concerns regarding Greece mounted.

Economically-sensitive stocks led the declines in Europe—autos, construction, banks and basic resources were the biggest decliners. Dexia was off 19% as the bank admited it is facing structural problems.

Deutsche Bank sank 6% after cutting its outlook although the stock is off its lows. But Louise Cooper at BGC Partners warned that “without a solution for the euro-zone debt crisis, banks will continue to be very shaky.”

US industrial new orders are at 2 p.m. GMT. Investors will also be looking forward to Fed Chairman Ben Bernanke’s testimony before the Joint Economic Committeem also starting at 2 p.m. GMT.

The FTSE 100 was down 2.6% at 4,946.18 Tuesday morning, sinking deep into the red and trading below the psychologically key 5,000 level as debt worries escalate.

This follows news that euro-zone finance ministers have proposed that Greek debt holders will face larger writedowns and have delayed the timing of the next round of loans to the country.

Against this backdrop, banks and miners are feeling the pressure,” suggesting there continues to be a widely held belief amongst investors that the economic slowdown and Greek crisis [are] set to get worse before getting better,” adds IG Index.

Barclays down 5.7%; Xstrata off 4.9%. Eyes turn to U.S. industrial new orders at 2 p.m. GMT.

While Franco-Belgian bank Dexia’s woes grabbed investors’ attention, Brussels is also hosting Brazilian President Dilma Rousseff on her first full official visit to Europe.

She promised Europe “you can count on us” when it comes to taking responsibility, without explaining what this actually meant.

She also said a lack of political coordination is partly to blame for the bloc’s sovereign debt crisis.

At the same meeting, European Council President Herman van Rompuy reiterated his support for the single currency.

“The EU is determined to maintain stability of euro area,” the normally reticent politician who writes haikus in his spare time told reporters. “We will continue to act in a forceful way to address the current tensions in sovereign debt market.”

7:18 am

Winners and Losers in Commodities Markets, According to Barclays Capital

Cocoa, platinum, cotton, lead and carbon would be the best performers among commodity markets should the world slide into a double-dip recession, according to research by Barclays Capital.

“Most of this group have already seen big price falls and have a fairly low level of linkage to the global economic cycle and good support from emerging markets,” said Kevin Norrish and Roxana Mohammadian Molina, who wrote the report.

Feeder and live cattle, lean hogs, gasoil and KBOT wheat were seen as most likely to suffer amid the turmoil gripping financial markets due to the level of fund involvement in their markets and limited price declines so far.

Copper, which has already lost about 30% of its value since the start of August, was seen as vulnerable due to its high world inventories, but Chinese buying and high production costs should put a floor under prices. And despite its resilience during the recession of 2008, gold was also seen as ripe for a pullback.

The fact that it remains up over the past three months “suggests that if the same price relationships hold as in 2008, then precious metals may not perform quite as well in any forthcoming recession as they did in the previous financial crisis,” said the bank.

The Australian dollar has long been considered the canary in the global economic coal mine. It climbs when times are good, because of the country’s bumper mineral exports. It slides when times are bad, because investors think those exports will evaporate.

No prizes for guessing that its fluffy yellow feathers are scattering far and wide Tuesday.

The country’s central bank helped it along its way in Asian trading, keeping interest rates on hold and dropping a big hint that it could in fact start cutting rates as early as next month—a solid sign that a major global slowdown is upon us. But in addition, the currency’s tendency to fall when equities are generally under pressure is not helping.

In early European trading Tuesday, the currency sank to its lowest point in a year, at $0.9416 against the US dollar. It is showing no signs of bouncing back as European trading hours progress. That leaves it a chunky 15% down from its July peak just above $1.10.

If you think that’s a hefty drop, there could be much more to come. Stephen Jen, who runs investment and advisory firm SLJ Macro Partners, reckons that in this endlessly evolving crisis, the US dollar has further to climb. Much further.

Maybe 40%. By definition, that means other currencies, including the Aussie dollar, but also the euro and sterling, could have a long way to fall.

The growth fears roiling market sentiment for crude oil and the companies that produce it could also be an opportunity for investors to “add to well-positioned energy names,” says Credit Suisse in a note Tuesday, adding that it would take a severe global credit crunch to derail this view.

With the medium-term challenge of meeting rising global energy demand still a significant one, Credit Suisse cites a preference for large cap exploration and production companies like Apache Corp., Devon Energy Corp. , Talisman Energy Inc. and Occidental Petroleum Corp. as likely beneficieries from a reboot in oil markets.

The cost of insuring European bank debt fell substantially after previously hovering just under record highs in early trading, as the troubled French-Belgian bank Dexia was offered support from Belgium and France.

Stock markets in the Gulf Cooperation Council area fell sharply Tuesday amidst an international equity selloff.

Worries about a sputtering global economy crimping oil demand remains the main worry for investors in the world’s largest oil producing bloc.

But some analysts reckon risk premia will contract as positive characteristics of the GCC markets versus emerging peers become more apparent in the coming year.

Religare Capital Markets’ regional strategist Emad Mostaque says Middle East & North African governments will continue to receive exceptional hydrocarbon income—over $1 trillion a year by current forecasts of $110 for Brent over the next few years, and is not worried about spending coming to a halt even if oil prices comes down given that sovereign assets are typically in excess of 100% of GDP and debt is minimal across these countries.

Greek finance minister Evangelos Venizelos said, in a press conference in Athens today, that the country could still miss its 8.5% deficit target for 2011 if citizens did not fully back emergency tax measures.

Mr Venizelos, who blamed the deeper-than-expected recession for Greece missing the 7.8% original deficit target this year, warned that “if the state and the citizens don’t comply, we will likely have problems with our 8.5% deficit target”, but called the goal “perfectly achievable”.

Purchasing managers’ surveys suggest much of continental Europe is facing a downturn, if it isn’t already mired in one. The U.K. economy has slowed to a crawl and further turbulence in the euro zone would ripple through quickly into Britain’s already fragile export sector.

In the U.S., investment bank economists have been marking up their recession expectations. But some, like Lackshman Achuthan of ECRI, an organization that measures the U.S. business cycle, figures the economy is already sliding into a downturn.

FTSE 100 was down 3.5% at 4897.5, Tuesday 1.00 p.m. after breaking through the 4,900 level with August’s low of 4,791 now in focus.

Equities sank as a Bank of Italy executive said the euro is at a crossroads. In addition, the BNP Paribas chief executive said a number of EU banks need to be recapitalized, which added to the day’s gloom.

Basic resources stocks and banks continued to lead the downside. Xstrata was down 8.9% and Lloyds Banking Group off 7.8%.

Traders noted that U.S. stock futures are sinking, with the DJIA and S&P 500 front-month contracts both down 1.1%.

Stocks are tumbling across Europe. Bank stocks are leading the way, with poor old Dexia down by 33% .

So, why the market panic? The eurocrats keep telling us that Greece is fine. Didn’t anyone get the memo? They just need a little more time to finish their reviews, and then probably review their reviews, so the Oct. 13 Eurogroup fin mins’ meeting is now canceled. But really, everything’s on track, Greece has enough cash to see it through to November (though that’s not what Greece says).

European Union President Herman Von Rompuy says he will “act in a forceful way to protect the euro.”

Hungary’s five-year credit default swap, or CDS, has risen to its highest level since March 2009, to 5.68%, some 0.22 percentage point wider on the day, according to Markit.

Although this trend is in line with general European developments, Hungary’s rising country risk and weakening currency are not only due to euro-zone woes.

The Hungarian government’s recent measures act as an additional negative for the country’s assets in a world that is already plagued by risk aversion hitting emerging markets regardless of fundamentals, Nordea economist Elizabeth Andreew said.

The government’s announcement Monday further worsens the situation: its decision to take over and restructure county-level government debt of 180 billion forints ($794 million) could raise the government’s fiscal burden and credit risk, BNP Paribas said.

The decision was also the reason why Hungary’s CDS underperformed the rest of the market, it added.

DUBLIN–Ireland has secured the agreement of euro-area finance ministers for reductions in the cost of its bailout, Irish Finance Minister Michael Noonan said Tuesday, adding that he welcomes Irish central bank forecasts showing the country’s economy is starting to grow again.

The reduction in the interest rates for its international bailout announced in July was “agreed in principle” and now doesn’t require any further assent from European Union ministers, Mr. Noonan told Irish broadcaster RTE Radio from Luxembourg, where he is attending a meeting of fellow euro-area ministers.

BERLIN–Germany’s Deputy Economics Minister Stefan Kapferer has called for creating guidelines to regulate an orderly insolvency of a euro-zone member, in a letter to Joerg Asmussen, his counterpart at the Finance Ministry.

The letter highlights how the debate over resolving the euro-zone debt crisis is increasingly moving towards establishing a proper framework for sovereign default, despite being short on detail about the specific rules that may be needed.

“We need a comprehensive restructuring process for these countries,” Mr. Kapferer wrote. “Therefore it is necessary to establish an orderly procedure to re-establish a country’s competitiveness.”

LUXEMBOURG—Divisions among euro-zone members over whether to push for a bigger private-sector writedown on Greek debt opened up Tuesday, with senior officials from the bloc saying there was growing momentum behind the idea of pushing for a bigger contribution from private creditors to a second bailout package for Athens.

U.S. stocks opened lower, with the Standard & Poor’s 500 tumbling into bear-market territory as increasing fears over euro-zone debt issues and a slowing global economy weighed on investor sentiment.

The Dow Jones Industrial Average sank 144 points, or 1.4%, to 10512. The S&P 500 dropped 15 points, or 1.3%, to 1084. It’s down more than 20% from its intraday high in early May, a threshold that many analysts believe signals a bear market is underway. The technology-heavy Nasdaq Composite slid 18 points, or 0.8%, to 2317.

Kuwait is not worried about the drop in oil futures and sees no need for OPEC to take action as prices are still relatively high, said Imad al-Atiqi, a member of the Supreme Petroleum Council, or SPC, the country’s top energy decision-making body.

Mr. Al-Atiqi said that crude prices were previously too high and that the current fall is due to pressure from speculation and European debt woes.

“If you look at fundamentals now, they are sound, and more stable than before when we first had the Libyan outage,” he said.

It has been nothing short of a bloodbath for currencies in emerging Europe and Africa Tuesday.

The Turkish lira slumped to a fresh all-time low against the dollar, while the forint tumbled to its weakest level against the euro since April 2009.

Even the Czech koruna—which has often enjoyed a safe-haven status—was not immune, as mounting concerns over Greece and the global economy led investors to pull back even further from emerging-markets bets.

Market participants are now on high alert for a fresh run of central bank action to stem currency weakness.

We’ve already seen authorities in Poland, Romania and Russia defend their currencies this week.

Hungary could soon join the fold, given its huge foreign currency debts and high sensitivity to forint weakness. Now that the euro has rushed above 300 forint, some observers think the National Bank of Hungary could even deliver a 3 percentage point interest rate rise.

The FTSE 100 was down 3.2% at 4,912.58, late afternoon Tuesday, paring losses.

The index had been off 4% earlier as Fed Chairman Bernanke began to address Congress’s Joint Economic Committee. He warned about the U.S. labor market which does not bode well for Wednesday’s ADP employment data and Friday’s nonfarm payrolls report.

U.S. stocks were also a touch off lows; still, the DJIA is down 1.7% or 166 points. Tuesday’s economic data hasn’t helped the mood—U.S. industrial orders fell 0.2% in August, with economists surveyed by Dow Jones Newswires having expected the reading to be unchanged. Bernanke’s testimony continues.

London’s FTSE 100 ended 2.6% lower at 4944.44, having been 4% adrift at one point during the session. It’s the first close below 5000 since July 2010, and economically sensitive banks and basic resources stocks led the declines.

“Fears of banking-crisis contagion have returned,” says IG Index. “Goldman Sachs revised world growth forecasts downwards and Greece were told they are not getting their next big brown envelope until mid-November. These are all ingredients in today’s cauldron of panic selling.”

On Wednesday’s economic agenda, U.K. PMI services data are at 0830 GMT. But all eyes will be on the U.S. ADP employment survey at 1215 GMT, particularly ahead of Friday’s nonfarm payrolls report.

The Euro Stoxx 50 ended 2.2% lower at 2091.09, after a torrid session. The focus was on banks, with investors worried that a funding crisis is brewing as the euro zone’s debt problems increase. Dexia shares lost 22.5% as the bank admitted structural problems; BNP Paribas fell 5.1%, Société Générale 4.9%.

“The last few months bear all the same … signs that preceded the previous banking crisis in 2008–and with the deep losses suffered by major banks still living fresh in the memory of investors today, who can blame investors for selling their bank holdings?” said Joshua Raymond at City Index.

Comments (3 of 3)

1.) Traders make comissions whether stocks go up or down. 2.) Traders instil the word “fear” to keep their comissions going 3.) Stop computerized trading – 7 plus trillion shares traded means that each person on this planet traded a whole bunch of stocks – not. 4.) Europe has been in large debt for over a hundred years. So what’s with the hype now? Seems to me all of these so called financial wiz-kids or so called analysts really do not know squat. 5.) Wall Street and European traders preach “don’t panic” keep your investments, don’t pull out… So what do Wall Street and European traders do they PANIC because they know a computer will do the trading. What if they had to manually fulfill their trades ? They would complain of being over worked. 6.) I could go on, but you have gotten a chuckle out this already. 7.) Just one more item – what ever happened to common sense ?
8.) Another good one - what if there was no margin buying and selling ? If a share was at 100 you traders would have to buy it at 100 not at 50 in hopes it would go to 110+. Traders would actually have to put their money where their mouths are. My gosh they would be scared crapless

2:01 pm October 4, 2011

Klaus Kastner wrote:

A country's current account shows the balance of its external transactions. Exports and services (tourism, shipping, etc.) are inflows of money from abroad; imports are outflows of money. If a country, like Greece (or the USA), has a substantial current account deficit, it is importing capital (and exporting jobs).

A current account deficit is not necessarily bad per se. An economy, like Greece's, which generates little domestic capital needs to import capital in order to finance its growth. The question is what the imported capital is used for. If it is used for consumption, it ends up as foreign debt without any counter-value (like in Greece). If it is used for investment, it will generate future returns in order to repay the debts abroad.

Greece will have a structural current account deficit for many years to come because she imports so much more than she exports and the resulting gap is far too large to be closed through services.

The conclusion is as simple as it is obvious: going forward, Greece must import the foreign capital which she needs in the form of equity and not debt. Why not debt? Because Greece will for a long time not be in a position to take up new foreign debt (except for the so-called rescue loans).

Foreign investment does not come by mandate. It comes because foreign capital sees interesting investment opportuntities in Greece. Today, only a fool would transfer capital for investment in Greece. As a result, Greece has no choice but to evaluate all possible ways how she can create a business environment which foreign investors will consider as attractive from a security and return standpoint.

I don’t see why everyone is so upset by this. If they default let them go back to printing Drachmas.

All debts including bond holders, pension liabilities and wages would be paid in a cheaper currency. Not a great solution… but one that “contains” the problem locally. The same should be true for any other country in this situation.

The cheaper currency will boost the Greek economy which is mostly tourism.

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